(Yicai) July 26 -- The price of Chinese government bond futures reached new records in the last two days after big state-owned banks cut deposit yields and the central bank slashed the interest rate on its medium-term lending facility to ensure ample liquidity in the banking system at month end.

In early trading today, China’s 30-year Treasury bond futures soared 0.46 percent to hit a record high of CNY110.58 (USD15.16), although by the end of the day, they closed up 0.32 percent at CNY110.42.

And yesterday, the 30-year Treasury bond futures also reached an all-time high, edging up 0.4 percent to close at CNY110.12 (USD15.19). Although the most active 10-year government bond dipped 0.04 percent that day to finish at CNY105.80, it hit a new high during trading hours.

The People's Bank of China released CNY200 billion (USD27.6 billion) worth of funds into the financial system via one-year MLF operations yesterday and lowered the interest rate to 2.3 percent from 2.5 percent.

This is a much bigger cut than the 10 basis point reduction to the seven-day reverse repo rate and standing lending facility that it made on July 22.

Short-term interest rates have already narrowed 10 bps from before the cut, Shanghai Securities Journal reported today, citing a market veteran. This reflects the full potential of this month’s trimming of the seven-day reverse repo rate. Adjustments to long-term and ultra-long-term interest rates are more conservative.

“A bullish sentiment in the bond market was ignited after the six state-owned banks said that they are lowering their deposit yields, and after the PBOC trimmed the market rates for both deposits and loans,” the person said.

As the MLF rate approaches 2.3 percent, the lower limit of government bond yields has been temporarily opened up, according to a research report released by Shenwan Hongyuan Securities. Ten-year treasury bonds dipped below 2.2 percent today, closing at 2.18 percent.

“2.4 percent will probably remain as the lowest yield of China’s 30-year treasury bonds, but whether the central bank will make a stand for it further remains to be seen,” said Qin Han, fixed income analyst at Zheshang Securities. "Once there are signs of there not being a lower limit, long-term interest rates may spiral downward further."

Editor: Kim Taylor